Leaked government document says Canada should end fossil fuel subsidies

Blog -
May 26, 2010 - By Clare Demerse

Today's newspapers
carry reports
of a fascinating government briefing note that advised Canada's Minister of
Finance to cut back on federal tax breaks to fossil fuel producers. The
question now is whether ministers are listening.

The leaked briefing
note, quoted extensively in an article by journalist Mike De Souza, advised Finance
Minister Jim Flaherty to "lead by example" before this summer's G20 summit in
Toronto by committing to phase out subsidies that benefit the companies
producing oil, natural gas and coal.

U.S. President Barack Omaba explains the Pittsburgh G20 agreement to phase out fossil fuel subsidies.Those subsidies are
on the summit's agenda thanks to a commitment that G20 leaders reached last
September in Pittsburgh, where — under the leadership of the Obama
Administration — they agreed to
"[r]ationalize and phase out over the medium term inefficient fossil fuel
subsidies". As a starting point in reaching that goal, G20 leaders asked their
energy and finance ministers to report back to them on strategies and
timeframes at Canada's summit this June.

According to the
media reports, the top bureaucrat at the Department of Finance recommended in
no uncertain terms that Canada live up to this commitment. In a briefing note
to the minister, he wrote that phasing out fossil fuel subsidies could help improve
Canada's international reputation and would be consistent with the government's
stated economic policy goals.

The briefing note explains
that the time for tax breaks to the fossil fuel sector is over: "These measures
were historically premised on factors such as exploration risk, spillover
benefits of exploration to third parties (similar to R&D), large capital
requirements, price volatility, and a desire to be competitive. Today, however,
it is not clear that these factors are unique to the sector or merit
preferential treatment."

According to
Pembina's estimates, the Government of Canada's current tax breaks for the oil
and gas sector are worth somewhere in the neighbourhood of $2 billion a year. (In
comparison, today's newspapers also carry stories about the high costs of
security at the G8 and G20 summits, which is estimated
to cost up to $1 billion.) Particularly at a time when the government is facing
a deficit, it's easy to envision better uses for this revenue than subsidizing
the production of the fossil fuels that are responsible for the overwhelming
majority of our greenhouse gas pollution. Instead, we would love to see that
revenue invested in the transition to a clean energy economy in Canada and used
to support climate action in developing countries.

Understanding Canada's Tax Breaks to the Fossil Fuel Sector

In 2005, Pembina
economist Amy Taylor published a comprehensive analysis of federal subsidies
to the oil and gas sector. Using 2002 data (the most recent available at the
time), Amy found $1.4 billion in annual tax subsidies to Canada's oil and gas
industry.

The Canadian oil and gas sector currently receives roughly $2 billion a year in government tax breaks. The
report's methodology compared the tax treatment of the oil and gas sector to a
"neutral" tax system, meaning a system that does not favour one industry type
over another.[1] In 2006, the Department of
Finance published a plan called Advantage Canada that committed to "enhancing the overall fairness and
neutrality of the tax system" — which means that reducing tax breaks to
favoured sectors should be part of the government's tax policy even without the
G20 commitment.

Since
Amy's report was published, there has been some progress — albeit at a very slow
pace. In Budget 2007, the government committed to phase out the "accelerated
capital cost allowance" for the oilsands by 2016, starting in 2011. The
government has also ended two other tax advantages, "earned depletion" and "resource
allowance" subsidies. A specific subsidy for Syncrude ended in 2003.

On
the other hand, the federal government has reduced the overall tax rate for the
oil and gas sector relative to its 2001-02
level. (In 2002, the higher tax rate that the sector paid was equivalent to a
debit of $92 million relative to a neutral tax system.)

Several
of the subsidies to the fossil fuel sector noted in Pembina's 2005 report
continue unchanged, including the:

Canadian
Exploration Expense

Canadian
Development Expense

Canadian
Oil and Gas Property Expense

Atlantic
Investment Tax Credit and

Scientific
Research and Experimental Development Tax Credit.

In 2002, the value
of those subsidies added up to about $1.1 billion.

And Canada's oil
and gas sector has been growing significantly. The subsector that includes
refining has seen revenue growth
of about 15 per cent per year (1998-2007),
while the total value-added (GDP) of the mining, quarrying and oil and gas
extraction sector has grown
from $50 billion in 1999 to over $55 billion in 2007 ($2002).

As a
ballpark figure, then, we estimate that the current federal tax subsidies to
the oil and gas sector are now in the range of $2 billion a year.

Of course, that's just an estimate. We
would love to be able to refine it by seeing the federal government's own
estimates of the tax subsidies it provides to oil and gas — something that we
would expect them to publish as part of the "implementation strategies and
timeframes" that their G20 commitment requires.

We believe that living up to our
commitment is the right thing to do, both for economic and environmental
reasons. And thanks to today's media reports, we now know that very senior officials
inside the federal government have made a persuasive case that Canada needs to
end its tax breaks to fossil fuel companies.

The leaders of the G20 will assemble in
Toronto on June 26, and the G20's finance ministers will meet in South Korea
next week in prepare for that summit. This leaves Minister Flaherty and Prime
Minister Harper just over four weeks to show that they're paying attention to
their own experts and prepared to lead.

[1] Specifically,
this means the same general tax rate is applied to all activities, operating
costs are fully deductible in the year incurred, there are no incentives,
preferential tax rates or exemptions from tax, and deductions for all capital
assets are depreciated in a consistent manner.